Obama should not compromise on Social Security and Medicare

The president and a few other prominent Democrats are openly suggesting that Social Security payments be reduced by applying a lower adjustment for inflation, and that Medicare be means-tested.

This is even before Democrats have begun formal budget negotiations with Republicans -- who still refuse to raise taxes on the rich, close tax loopholes the rich depend on (such as hedge-fund and private-equity managers' "carried interest"), increase capital gains taxes on the wealthy, cap tax deductions or tax financial transactions.

It's not the first time the administration has led with a compromise, but these particular pre-concessions are especially unwise -- economically and politically.

Consider the economics. The Social Security fix the administration is touting -- technically called a "chained CPI" for an alternative way to compute changes in the Consumer Price Index -- is based on the common-sense notion that when prices rise on certain products, consumers switch to lower-cost substitutes. If steak becomes more expensive, for example, some will switch to hamburger.

According to this view, when it comes to adjusting Social Security payments for inflation, retirees don't really need as much of an increase as they've been getting -- since, like most people, they can just substitute lower-cost products.

But this leaves out a major piece of reality. Unlike most other Americans, seniors pay 20 percent to 40 percent of their incomes for health care. They can't switch to lower-cost alternatives because they either don't exist or seniors aren't in a position to shop for them.

In addition, health-care costs have been rising much faster than inflation. So even the inflation adjustment now utilized for Social Security underestimates how badly inflation is eating away at the meager savings of most seniors.

The fact is, Social Security is more important than ever. Private pensions providing a certain monthly benefit have all but disappeared. The homes many retirees had assumed would become their nest eggs when they stopped working are worth far less. Most retirees haven't saved nearly enough -- which is why so many people are postponing retirement (and clogging the pipeline for younger people).

Social Security is just about the only thing many seniors can count on.

Social Security isn't even responsible for the budget deficit. It's been in surplus for decades. Those surpluses have been used by the federal government to pay its other bills.

The Social Security trust fund could be flush for the next 75 years with only minor changes that wouldn't reduce payments to seniors. A simple fix would be to raise the ceiling on income subject to Social Security taxes. That ceiling is now $113,700.

Given how much income and wealth have now concentrated at the top, why not get rid of the ceiling altogether and exempt the first $15,000 of income from Social Security payments?

The case against "reforming" Medicare by reducing benefits flowing to higher-income beneficiaries is almost as weak.

The only way to reap significant savings from "means-testing" Medicare would be to cut benefits that would otherwise flow to many middle-income retirees. But these people are almost as vulnerable to rising health-care costs as are lower-income retirees.

Means-testing Medicare also runs the risk of transforming Medicare into a program for the "less fortunate," which would undermine its political support.

Besides, Medicare isn't the real problem. Medicare costs are projected to soar because overall health-care costs are rising so fast.

Medicare's administrative costs are a fraction of those of private health insurance. So rather than think of Medicare as the problem, it could be part of the solution. Medicare for all, or even a public option for Medicare, would give the program enough heft to demand that health providers move from a fee-for-service system to one that paid instead for healthy outcomes.

With health-care costs under better control, retirees wouldn't be paying a large and growing portion of their incomes for health care.

Social Security and Medicare are the most popular programs ever devised by the federal government -- and among the most successful. Together, they have dramatically reduced poverty among the nation's elderly, one of the great triumphs of modern times.

Yet ever since Social Security's inception in 1935 and Medicare's 30 years later, Republicans have been trying to get rid of them. If average Americans have trusted the Democratic Party to do one thing over the years, it's been to guard these programs from the depredations of the GOP.

Why should Democrats now lead the charge against them?

Robert Reich, former U.S. Secretary of Labor, is professor of public policy at the University of California at Berkeley and the author of "Aftershock: The Next Economy and America's Future." He blogs at www.robertreich.org.